National Development Bank PLC (NDBN0000) Earnings Call Transcript & Summary

Good morning, everyone, and good afternoon to those who have connected from the Far East. Welcome to NDB's Investor and Analyst webinar for first half 2024. The Director CEO of NDB, Mr. Kelum Edirisinghe, will first take you through our prepared presentation, at the end of which, he will open up the forum for Q&A. He will be joined by a panel of senior management representatives of the bank; K. V. Vinoj, DCEO; Sanjaya Perera, Senior Vice President, Personal Banking and Customer Experience; Hasitha Athapattu, Vice President of Finance; Niran Mahawatte, Vice President Treasury; and myself, Bimal Perera, Vice President Strategy and Business Intelligence. We request all participants to please remain on mute with video switched off throughout the presentation and during the Q&A. [Operator Instructions]. Thank you. And now over to Kelum to take the presentation forward.

Thank you, Bimal. Good morning and good afternoon, everyone. Thank you for joining our second quarter performance webinar. Format of the webinar remains relatively unchanged, but we have changed the slide deck a little bit to give a few more data points, which I hope you'll find useful. Just starting on the sector performance. we see CBSL continuing at its loose monetary policy stance, supported by good inflation data. Against this backdrop, the policy rates have come off quite steadily. And with the recent 25 basis points rate cut. SLFR and SDFR have reduced to 8.25% and 9.25%, respectively. Along with the reduction in policy rates, lending rates have also come off. However, in the recent weeks, we have seen G-Sec and prime lending rates picking up a bit. Credit growth in general has been slow. And we expect that to remain at the same level, at least until presidential elections are concluded. Coming to our performance. First and foremost, I must say that we had a strong first half. PBT grew by 58% or LKR 6.5 billion. NIMs increased by 30 basis points to 4.26%. This is, in fact, the highest NIMs that we have reported during the last 10 years. Our strong cost discipline ensured our expenses remained within budget and reported a healthy cost-to-income ratio of 34.86%. By carefully managing our asset quality, we were able to prevent any credit migration and reduce our stage 3 loan stock. Impaired loan ratio was down 90 basis points to 7.68%. ROE was marginally down due to annualized first half being lesser than that of the full year 2023. Tier 1 ratio reported a marginal decrease of 58 basis points. This is due to the combined effect of cash dividend that was paid in 2023. And OCI losses coming through in our first half. It's worth noting that our first half Tier 1 ratio does not include the first half PAT. However, if PAT of 3.2 billion was included our ratio would improve to 11.79% versus 11.67% over full year 2023. Looking a bit more into detail in financials. Gross income was down about LKR 14 billion or 21% of our history because of the low rate environment. However, we were able to improve our NIMs by about LKR 1.5 billion or 10% over history, largely by repricing our deposit book. Total operating income reported about a 24% growth of LKR 4.4 billion supported by increase in NII and in FBI. Impairments were marginally up by about 7% over history to about LKR 8.4 billion. But this was very much within our impairment buildup on a BAU basis. Operating expenses were up 23%, and this was largely as a result of increase in personnel expenses. But here too, it was very much within our plan. Overall, we were able to deliver LKR 6.5 billion in PBT and LKR 3.2 billion in PAT, up 58% and 37%, respectively. Total assets reported a slight degrowth and that was in part due to taking profits on some of our bond holdings. But however, although credit demand was dull, on a more positive note, we were able to increase our loan book by about LKR 9 billion, and also, we maintained a strong deposit franchise despite our deposits being repriced. Going a bit more into NIMs. On margins, despite the sharp reduction in interest income, we were able to report a higher NIM of LKR 16.5 billion or 10% over history to the same reason that I said previously, we were able to reprice our deposit book more aggressively in a more timely manner. And as I have said in my previous webinar as well, improving NIMs remain a key priority of ours. And we will continue to review our deposit and lending rates based on market rates. On nonfund-based income, fee-based income was under pressure due to the general market sluggishness. Lower import volumes and tighter tariffs as well as thinning of FX spreads. However, overall, our nonfund-based income was boosted by a partial sale of our bond holdings. And from that, we were able to generate about LKR 2.7 billion and thereby boosting NBFI by about 83% over history. On credit quality, we have a good story here, although for the first half impairments increased by 7%. This was very much within our impairment buildup, and we were able to protect our and to have more cushion for further downside risk. What is important note are the improvements in impairment covered and the Stage 3 ratios. Owing to additional impairments and growth of the loan book plus reduction in Stage 3 loans, overall impairment cover improved to 9.08%. Our Stage 3 ratio reduced to about 7.68% and impairment to Stage 3 loans improved to 44.33%. As far as fully impairments are concerned, we expect it to be lower than first half annualized figure. On operating expenses, total operating expenses reported an increase of about LKR 1.5 billion or 23% over history, and this was largely as a result of staff emoluments. However, our cost-to-income ratio remained at healthy below 35%. We have a good handle on cost and we are confident of being able to maintain the same level of cost for the second half as well. On taxes, the slide is pretty self explanatory. We contributed about LKR 3.3 billion to the state by way of taxes. Our effective tax rate stood at 50.99%. Coming to more balance sheet matrices and particularly on customer loans and on deposits, actually, in a market that was bit dull in terms of credit growth, we were successful in putting on about LKR 15 billion in new loans and advances. As you can see from the bar chart on the side, that growth was somewhat diluted because of the FX impact to the tune of about LKR 6 billion. There was a similar FX impact on deposits and in terms of LKR, the book remained largely flat year-on-year. The 4% reduction in investments that you can see is as a result of partial sale of bond holdings on a BAU basis and also to crystallize some of our -- some of the gains that we thought was appropriate at the time. Our capital ratios and liquidity ratios are strong. Tier 1 and total CAR are well above the regulatory minimum and have sufficient buffers for any shocks. We have also announced a LKR 10 billion debenture issuance as part of our capital augmentation plan. And you will hear more on this in the coming weeks in the media. Coming to key ratio -- a key investor ratios. End of June saw an increase in share price, along with the general rally on stocks. When we closed trading on Friday, NDB share was trading at LKR 70. ROE remains low, but we are confident of being able to improve it with more profitability towards the full year. And on liquidity front, we remain well liquid with rupee and all currency LCR above 280% and 260%, respectively. On awards, we have won several awards, and I'll probably call out on a few. We won Euromoney Award and Asian Banking and Finance Magazine award for 2024. And we continue to target awards that we think worthy of winning, and that is something that we will continue as we go forward. Looking ahead, my team and I are committed to continue the good work that we have done so far, which is, in fact, reflected in our first half performance. And as I have said previously, we remain focused on our 3 strategic priorities. Those being reduced cost of funds through transaction banking and improved portfolio quality. Lastly, I want to thank my team for their dedication and invaluable contribution. And without their support, none of this would have been possible. That brings us to the end of the formal presentation. I hope you find the new slides useful, and we'll obviously upload the deck to our investor presentation portal on the web. And along with that, I can now bring the formal presentation to a close, and we can move on to the Q&A.

So we have a couple of questions coming through the chat option. Let me take them and direct them to the relevant TLT member. This one is on the loan book. When it comes to the loan book, can you shed some light on sectoral distribution of loan book? In which sectors you have seen the highest impairment? Maybe perhaps Vinoj can take on the loan?

So I'll take the first one. Distribution still remains heavily skewed towards wholesale banking and project finance, still, I think that's the strong areas of growth for the bank, and that's where the book is also skewed. In terms of the impairments, I think these impairments are coming from -- of the legacy book and mainly coming out of construction, tourism, and those are the areas that we have seen highest impairments coming and also these are, to be mindful, that it's coming of the legacy book. I mean nothing that has -- we have seen in the last couple of years, the book has remained very good and very clean. But I think this impairment we have seen now from our legacy book which have been underwritten maybe a couple of years back.

There is a connected question. In which sectors currently contributing mostly to the loan growth? Vinoj, you want to take that?

Yes. So the loan growth still remains subdued, as Kelum said. But in the first half or at least in the second quarter, we've seen some growth coming out of again on the -- mainly on the wholesale banking book and some of the infrastructure projects. I mean that's where I saw the loan growth of LKR 15 billion coming from. I would attribute the loan growth to more on the retail side and as well as infrastructure development.

So there's a question on capital. Let me read it out. Would the debenture be sufficient? Or would the bank consider further capital raising via rights? Kelum, you want to take that?

Yes. So we have no plans to raise capital via rights and the debenture issuance is in line with the capital augmentation plans that we have commented previously. So we consider that to be sufficient.

There's another question on ISBs. Could you please give an update on your ISB holdings as of now in USD terms and the percentage provided for same as of now. Hasitha, you would like to take that question?

In USD terms, $147 million, and we have provided 53% of the total amortized cost. It's in the presentation also.

There's another question on the loan book growth. When are you expecting for significant loan growth to come in? Do you see a slowdown of credit due to the election?

So maybe let me take that. And I think if you look at the numbers that are coming out both from the Central Bank and in general, publications and along with some of the numbers that the other banks have put out. I mean, loan growth has been quite subdued. And we don't expect that to change in a material manner before the elections, but we are hopeful that once election is concluded and with some level of political certainty coming in post election that there are to be some pickup. And in that regard, we are quite confident that there would be some demand coming from SME and that's an area that we want to target as well.

So there's a question on ROEs. Why are ROEs low despite an improvement in NIMs? Any medium, long-term target for ROEs? So maybe let me take that question. Yes, the NIMs have improved and we have reported NIM over 4.26%. That's the highest that we have seen in the last 10 years. However, you would have also noticed -- observed the impairment still seem relatively high. So that's what is really eating into the banking revenue. So we don't expect the same trend to continue for the second half. So over the medium to long term, we are looking at double-digit ROE. So that might happen maybe towards the end of the year and the years after that. So there's a question again on ISBs, are there any expectations to liquidate the ISB holdings?

So let me take that, Bimal. For the moment, we have not made a decision either way. And as you know, there are discussions taking place with regard to the restructure, finality has still not been reached. So we will take all that into account before making any decision.

There's another question on the interest rates or the interest cost. Do you see any further room to bring down the cost of funds as interest rates have started to bottom out. So this probably is about the net interest margins. So we've seen the benefit of deposit repricing in the first half and a large part of our deposit book has got no reprice. So through deposit repricing, I think further room for enhancement of the NIM is limited. But then there are other avenues where we can bring down the cost of funds by growing our CASA book through granular sustained CASA strategy, which the bank is working on. But they are, of course, more long term in nature. So purely by repricing deposits, large part of that benefit has already been accrued to the P&L in the first half. So there's another question on impairments. Let me read it out. Impairments still continuing in Tourism, maybe that's a question. Any reversals in construction and tourism as we understand the industry's recovery?

Okay. So, let me take that question as well. So as Vinoj said, we are very comfortable with where we are as far as impairments are concerned. And for the second half, we expect that to be less than the first half. So whatever the impairment buildup that we are doing that is for known names and those are across all sectors. Since the question is on tourism and I think something that we can take heart of is that tourism numbers are picking up and some of the assets that are currently in work out are seeing strong cash flows, and we believe that they will be able to move into the performing book in time to come, but not in a position to give specific numbers as well. I think the current ISB holdings -- Hasitha did mention that. So that's $147 million right? Hasitha, yes.

Maybe this is a question to Sanjaya, do you expect housing loan rates to decline to single-digit levels and overall lending rates to be further diluted. Maybe, Sanjaya, on housing loan side?

Yes. So far, we have reduced the housing loans. Our rates have come down drastically, but I'm not sure whether it's too early to comment whether it will be single digit. It all depends on the overall market. So we'll have to wait and see for that.

There's another question on the portfolio composition. Let me read out the question. NDB Bank's loan-to-asset ratio for FY '23 was around 57%. Other banks were below 50%. What is your loan to asset ratio expectation by end of this year? So I mean, we don't expect a major deviation of our portfolio composition. We will, of course, look at the best deployment opportunity in deploying our deposits or funds available, but we don't expect a major deviation of the composition from where we closed the last year. Any reasons for the exchange rate to appreciate recently, Niran, you want to take that?

Yes. Especially, we have seen during the last month or so some of the import volumes have significantly dropped in the market, especially from the retail sector, as well from the consumer side and also from some of the other areas, from the SME side as well. Probably with the elections coming up and all that, we may see this trend continues. So otherwise, there has not been a significant increase from the exports and from the remittance size, but it's mainly driven from the drop in the import side. So that's why some of the surpluses are being sold to the Central Bank, and we have seen about $121 million being bought by the Central Bank. They have absorbed. And I'm sure during the month of August also, so far, they have picked up fairly a decent number.

So there's another question on personal loans. Maybe Sanjaya, I'll read it out. Has personal loans currently promoted or are they being discouraged compared to other loan categories? Do you expect an expansion in the personal loans portfolio?

Yes. Personal loans are being given. However, we are not aggressively looking at that mainly due to the current economic conditions. So -- but we are carefully looking at it. And mainly, we are focusing, I would say, mostly on housing and other secured products than personal loans for the moment.

Any expansion plans in the current financial year? If yes, how many? I'm thinking this is in reference to the branch network. If yes, how many geographical target and what's the breakeven period?

So maybe I'll take that, Bimal. Thanks for the question. So at the moment, we actually do not have any plans that have been made with regard to expanding the branch network. We're happy with the current footprint, and we will continue to focus on that and develop it.

So there's a question on, again, the portfolio, what would be the floating to fixed loan ratio of the loans. I don't know that we have that information.

No, I don't have that number from the top of my head, but I think that would have been disclosed in our financials as well last year, yes.

So, there's another question on retail products. How about the new credit card issued and outstanding credit card balances and any changes in the minimum salary scale to obtain a credit card. Sanjaya?

Well, in terms of the portfolio, we see a gradual increase in the portfolio. We are looking at the quality as well and quality has been improving, as you see economy is also improving. In terms of the minimum salary, underwriting standards keep on improving. So we are not going into the lower end, but at a medium level, case-by-case basis, we look at it and grant credit cards.

Okay. So there's another question on the bond sales. So what was the rationale behind liquidating the LKR bonds in 2Q '24. Niran, would you want to comment on?

Actually -- it acts actually as a business as usual. Because we do a little bit of -- we do quite a lot of trading activities in the bond market. So it was decided that maybe part of it, we will take it to the quarter because we saw a little bit of a -- we expected a slight uptick also in the rates. So because of that, we took the decision, but it's actually a part of -- this is actually, if you look at even the first quarter, we have been raising some of the capital gains. So that would be continued in that fashion. So -- but the second quarter, we did take a decision because we expected the rates also to be a little bit more volatile in the third quarter with running up to the elections as well. So we took a decision that we will utilize some of the -- we will actually accelerate a little bit of that and digitalize some of the portfolio.

So there's a question on the deposit book. What's the average maturity of the deposits? Let me take that. So a large part of our deposits are under 12 months. I think that's a systemic characteristic for the industry. And the average maturity would be somewhere between 6 to 8 months. That brings us to the close of Q&A. I don't see any more questions on the chat option. I guess we have come to the end of Q&A. I thank all the participants for attending the webinar, and -- there's one more. Okay. This is on the loan book. Is the downward repricing of the loan rates still in the process as interest rates -- as interest income has come down at a lesser pace compared to interest expense rate. Maybe I'll go at this as well. So, No, I think most of the variable rate loans have got repriced to the current market rates. So if you see the trajectory of the prime lending rate and most of our corporate tenants, some of our business banking loans are picked to the PLR and they have got repriced. Why you are seeing a lesser drop in the income compared to the deposit is because of more proactive deposit repricing that bank has been successful in doing in the first half, which has brought more bigger savings on the expense side and leading to an expansion in the NIM. But the most of the variable rate loans have got repriced to the current market interest rates. Seems like that was the last question. I thank once again all the participants who joined webinar and for your active participation to the Q&A. And let me thank the panel for their attendance and responses to all the questions that the investors had. There's another question that has just come before I close. On the ISBs. What is the status of tax implications related to ISBs? Did the inland revenue allow it as a deductible expense? If it is not deductible, what will be the impact on, I guess, capital adequacies. Hasitha, do you want to take that?

Yes sir, now the current regime, deduction of the impairment is not allowed, in the sense, there is sort of like all the industrialists will lobby with the IRD. But right now, it's not an allowable expense, but we want to make sure that it goes as a normal write-off. If it is not deductible, then there is a deferred tax reversal, but there is no impact on capital adequacies.

Maybe we have time for one last question. Could you please shed some color on the ISB sale? We haven't sold any ISBs so far. Were the bonds categorized under Held-to-Maturity? Yes, our bonds are categorized as HTM. Okay. I think that's about it. Thank you again, and we bring being -- with this we bring a close to the session. Thank you.